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IMF affirms India’s strong economic growth, recommends swift reforms

International Monetary Fund (IMF) has said that India’s potential growth rate is much higher, provided reform initiatives are accelerated. It also mentioned that India’s growth is expected to remain strong. It highlighted that risks to the outlook are balanced.

“Growth is expected to remain strong, supported by macroeconomic and financial stability. Real GDP is projected to grow at 6.3 per cent in FY2023/24 and FY2024/25,” the multilateral body said after the conclusion of the 2023 Article IV Consultation with India. Under such a process, a staff team from the IMF visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. Based on these, they prepare a report, which forms the basis for discussion by the Executive Board. After the discussion, the Managing Director, as Chairman of the Board, summarises the views of Executive Directors, and this summary is transmitted to the country’s authorities.

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The multilateral body further said that headline inflation is expected to gradually decline to the target, although it remains volatile due to food price shocks. The current account deficit is expected to improve to 1.8 per cent of GDP in FY2023/24 due to resilient services exports and, to a lesser extent, lower oil import costs. Going forward, the country’s foundational digital public infrastructure and a strong government infrastructure program will continue to sustain growth. “India has potential for even higher growth, with greater contributions from labour and human capital, if comprehensive reforms are implemented,” IMF said.

After good growth in the first two quarters (April-June and July-September), many agencies have revised India’s growth forecast upwards to 6.5 per cent or even higher during the current fiscal. Meanwhile, the Reserve Bank of India (RBI) upped its projection to 7 per cent. The government, too, feels that the growth rate during the current fiscal year would be higher than its earlier projection of 6.5 per cent.

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IMF noted that India’s economy showed robust growth over the past year. Headline inflation has, on average, moderated, although it remains volatile. Employment has surpassed the pre-pandemic level, and while the informal sector continues to dominate, formalisation has progressed. 

It also added that the current account deficit in FY2022/23 widened as the post-pandemic recovery of domestic demand and transitory external shocks outweighed the impact of robust services exports and proactive diversification of critical oil imports. While the budget deficit has eased, public debt remains elevated and fiscal buffers need to be rebuilt. Globally, “India’s 2023 G20 presidency has demonstrated the country’s important role in advancing multilateral policy priorities,” IMF mentioned.

Talking about risks to the outlook, the IMF said these are balanced. A sharp global growth slowdown in the near term would affect India through trade and financial channels. Further global supply disruptions could cause recurrent commodity price volatility, increasing fiscal pressures for India. Domestically, weather shocks could reignite inflationary pressures and prompt further food export restrictions.

On the upside, “stronger than expected consumer demand and private investment would raise growth. Further liberalisation of foreign investment could increase India’s role in global value chains, boosting exports. Implementation of labour market reforms could raise employment and growth,” Fund said.

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